The Hindu Business Line : `Factoring services lack legal protection'

WHILE foreign banks eye `factoring' as the future finance product for India, corporates operating in this space for the last 13 years are not quite upbeat about the prospects, despite sensing the potential.

"The industry has been moving at snail's pace since inception. This is basically because there is no legal framework to protect factoring services," laments Mr B. Sukumaran, Managing Director, Canbank Factors Ltd.

Excerpts from the interview to Business Line:

What in your perception has been the stumbling block for growth?

First of all, we don't have a legal framework to protect factoring services. The Bill was drafted six years back, but is yet to see the light of the day.

We need legal protection because all our advances are `clean advances'. We take an undertaking from the buyer and make the prepayment.

Debts are assigned to us. In the event of the buyer making the payment directly to the seller or deciding to set off against an earlier due, we cannot proceed against the buyer.

That is not all. We are categorised as a non-banking finance company). Therefore, we can't go for summary proceeding. There is no protection of Debt Recovery Tribunal (DRT) or Securitisation Act.

Why can't we be recognised as a financial institution instead, as this will enable us to approach the DRT and be covered under the Securitisation Act.

The third issue is stamp duty. When a debt is assigned, the stamp duty has to be paid. This duty is decided by the respective State Governments, which are neither willing to waive the duty nor have a uniform structure.

Considering the risk exposure, it is certain that factoring companies cannot grow without legal protection.

Is this situation peculiar to India?

In the Western countries, management of receivables is given to factoring companies. Commercial banks see it as a complementary service. But in India, commercial banks look at factoring service providers as competitors, because the bank's transaction cost is higher than the rates charged by factoring companies.

Furthering, we do not insist on collateral security, but banks do.

How do you manage to compete with bank rate?Do you get funds at concessional rate?

Commercial banks' transaction cost is definitely higher than factoring companies. And the return on asset for any NBFC ranges between 1.3 per cent and 1.5 per cent, but Canbank Factors is able to get four per cent. This is likely to come down this year because the margin has fallen.

Though Canara Bank backs us, I must say that the bank is maintaining an arm's length policy and the subsidiary is managed independently. The bank does not offer any rate concession.

Do you accept deposits?

We are an NBFC. We can accept deposits. But we have suspended collection of deposits for the time being, because we have to manage not just the cost of deposits, but also its servicing cost. We are at the moment watching to see how the market behaves.

More Stories on : Interview | Financial Services

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Rural bank with a difference

PSBs: Capital needs force rethink

Bonds recover; rupee unchanged

Peerless to seek easing of curbs on investment pattern

SBH raises fixed housing loan rates by 25 bps

Mini-ratna status for Hudco

Coimbatore LIC division scores on Bima Plus

New India Assurance profits jump 130 pc to Rs 4,046 cr

`Factoring services lack legal protection'